Risk of ruin

The probability that your bankroll hits zero before reaching your horizon, given your edge, bet size, and variance. Conservative position sizing keeps it near zero.

Even a positive-edge trader can go broke if bets are too large relative to the bankroll, because variance can string together losses. Risk of ruin makes that danger explicit, and the main lever to lower it is smaller, consistent position sizing.

Risk of ruin is the probability that a series of losses wipes out your bankroll before your edge has a chance to play out. Even a profitable strategy carries some risk of ruin if positions are sized too aggressively, because variance guarantees losing streaks that a thin bankroll cannot survive.

Three things drive it: your edge, your bet size relative to your bankroll, and the number of bets. A larger edge lowers it, larger bets raise it sharply, and a bankroll that can absorb many normal losses keeps it small. This is why position sizing, not trade selection, is what actually keeps traders in the game.

The practical lesson is that survival comes first. A strategy with positive expected value still fails if a normal cold streak ends it, so prudent traders size positions to make ruin vanishingly unlikely, accepting slower growth in exchange for staying solvent long enough for the edge to compound.